One of the most expensive strategic mistakes a company can make is becoming more efficient at something that is quietly becoming less important.
In 2001, Borders faced a perfectly reasonable business question.
The bookstore chain had hundreds of physical stores and a substantial investment tied up in making them productive. At the same time, customers were increasingly buying books online, where Amazon had built capabilities Borders was struggling to match.
Borders had operated its own e-commerce site since 1998. But in 2001, it stopped selling merchandise through its own online operation and handed the job to Amazon. Amazon became the merchant of record, controlled prices and terms, handled inventory, fulfilment and customer service, and retained customer payments. Borders received referral fees.
Looked at through one lens, the decision made considerable sense.
Amazon was exceptionally good at e-commerce.
Borders was exceptionally good at physical bookstores.
Why duplicate capability?
There was just one problem.
E-commerce wasn't merely becoming another way to distribute books. It was becoming another way to own the customer relationship.
The Question Behind the Question
Borders' leadership explained that the partnership would allow customers' online needs to be handled by an organisation that did it extremely well, while Borders concentrated on what it did best: creating an engaging physical environment for discovering books, music and movies.
There is nothing obviously irrational about that logic.
In fact, that's precisely what makes the case so useful.
Management decisions aren't made with the benefit of knowing what happens next.
At the time, Borders' own online operation was struggling. Its online business was generating significant losses.
Outsourcing could therefore be framed as an efficiency decision.
Why continue investing in an underperforming capability when a specialist could provide something better?
But there was another way to frame the problem.
Instead of asking:
How do we obtain an efficient online sales channel?
Borders might have asked:
What capability will become strategically important if the customer relationship itself continues moving online?
Those questions sound similar.
They lead somewhere very different.
Efficiency and Control Are Not the Same Thing
Companies outsource activities constantly.
Often, they should.
The important question isn't whether another organisation can perform an activity more efficiently.
It is what else you surrender when the activity leaves your control.
Amazon wasn't simply packing boxes for Borders.
Under the agreement, Amazon was the seller of record. It determined pricing and other terms, handled fulfilment and customer service, and controlled the transaction.
Borders still had an online presence.
But much of the capability behind that presence belonged to someone else.
That's the strategic distinction.
A channel moves products.
A capability creates options.
A customer relationship creates knowledge.
And knowledge about customers can shape what an organisation becomes capable of doing next.
The Assumption That Changes Everything
Every major strategic decision contains assumptions.
Some are explicit.
Many aren't.
In Borders' case, one implicit assumption appears particularly interesting:
Physical retail and online retail could be treated as sufficiently separate capabilities.
That assumption made outsourcing much easier to justify.
But consider a different assumption:
Physical and digital retail will increasingly become parts of one customer relationship.
Suddenly the economics of the same decision look different.
The question is no longer simply what it costs to operate Borders.com.
Now you must consider the value of learning how customers discover, search, compare and purchase books online.
You must consider the capability being developed through operating the channel.
And you must consider what strategic options become unavailable if that capability belongs elsewhere.
The immediate financial calculation hasn't changed.
The meaning of the calculation has.
The Decision Can Be Right for the Conditions You See
This is why hindsight is such a poor management tool.
It is easy to look at Borders through today's understanding of digital commerce and declare the decision foolish.
That teaches us very little.
The more valuable question is:
Why did the decision make sense at the time?
Borders had a large physical estate. Its own online operation was losing money. Amazon possessed superior e-commerce capability. Concentrating investment on what Borders believed it did best had understandable commercial logic.
The decision could therefore produce evidence that appeared to validate the assumptions behind it.
That's where strategy becomes difficult.
A decision can work operationally while weakening the organisation strategically.
What Are You Actually Outsourcing?
This question matters far beyond bookstores.
A bank can outsource technology.
A manufacturer can outsource logistics.
A retailer can outsource fulfilment.
A company can outsource customer service, analytics, software development, recruitment or cybersecurity.
None is inherently wrong.
But leaders need to distinguish between performing an activity and developing a capability.
Before outsourcing something because another organisation can do it cheaper, faster or better, ask:
What do we learn by doing this ourselves?
What information passes through this activity?
What customer relationship does it create?
What organisational capability develops around it?
What future choices does possessing that capability give us?
And how difficult would rebuilding it be if conditions changed?
Today's Efficiency Can Become Tomorrow's Constraint
Borders ultimately ended its Amazon arrangement and launched its own e-commerce site again in 2008.
By then, however, the competitive environment had moved considerably further.
The lesson isn't that companies should never outsource strategically important activities.
Nor is it that Borders' Amazon decision alone explains what eventually happened to the company. Borders' later difficulties involved considerably more than one decision.
The more useful lesson is about problem definition.
When leaders define a strategic capability as an operational activity, efficiency can dominate the decision.
The spreadsheet may show savings.
Execution may improve.
The immediate problem may disappear.
But the organisation may also stop developing something it will desperately need later.
Sometimes the most consequential part of a decision isn't what the organisation gains.
It's what it quietly stops learning how to do.
So where in your organisation are you currently asking, “Who can do this more efficiently?”, when the more important question might be, “What strategic capability and customer relationship are we giving away if they do?”
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